Self-Employed Individuals: Examples of How the New Tax System Applies

New Tax Framework for Self-Employed Professionals The government announced this, basing its decision—as all post-dictatorship governments have “traditionally” done—, in a presumptive “model” for determining taxable income, a sign of an inability to effectively “tap into” taxable income in a more “intelligent” and targeted manner from a professional class that “tends,” relentlessly, to tax evasion.

Essentially, it amounts to a “Change” to the Business Activity Tax, which was imposed by the troika, in an effort, even back then, to impose a minimal tax on the self-employed—or even in line with the “logic” of the Katrougkalos Law, which was heavily criticized because it it “taxed” social security contributions, yet “structured” the relevant tax brackets based on the assumption that self-employed professionals “hide” their revenue.

Essentially, with this “mutation” The penalty for “professional” tax evaders is increasing and at the same time The government's commitment to gradually phase out the business license fee is being honored, as this is reduced in specific cases; the following year, and over a two-year period, depending on revenue trends, it is eliminated. It also sends a “message” to society regarding the the need for tax compliance, as the expected revenue is expected to support—as stated by Minister of National Economy and Finance Kostis Hatzidakis—education, health care, and, depending on the results, the tax burden on labor or self-employed professionals—which is currently excessive for the highest income brackets, excessive and reaches 45%.

Thus, with the new system—which represents a “minimum” level of protection and is estimated to generate an additional 606 million euros— the tax authorities acknowledge that freelancers and the self-employed will necessarily have to “report” a net income of 10,920 euros or more, which corresponds to the minimum wage of 780 euros in the private sector for 14 months.

Determination of Minimum Compensation

The new system will be implemented for sole proprietorships, while a “safeguard” is also provided for the “after-effects” of the new “model” of taxation, for those who resort to the solution of transferring their KAD to another legal form (general partnership, limited liability company, etc.) in order to continue reporting “zero” income.

Specifically, The Ministry of Labor and Social Affairs states that the minimum wage is determined as follows:

1. The minimum remuneration may not be less than the greater of: (a) the minimum (base) wage increased by 10% for every 3 years of work as a self-employed person, after the first 3 years, and b) the highest annual salary (up to 30,000 euros) that the self-employed person pays to their staff

2. The minimum fee, as specified above, is increased in two ways, cumulatively:

A. an amount equal to 10% of the annual payroll costs (wages, employer contributions, benefits in kind) for the staff the self-employed individual employs in their business, up to a maximum of €15,000.

B. with a coefficient when the self-employed person’s annual revenue is significantly higher than the average annual revenue for the KAD code:

• 35% for those whose annual revenue exceeds 100% of the average annual revenue of the KAD code with the highest revenue

• 70% for those whose annual revenue exceeds 150% of the average annual revenue for the KAD code with the highest revenue

• 100% for those whose annual revenue exceeds 200% times the average annual revenue of the KAD code with the highest revenue, up to a maximum of 50,000 euros.

Consequently, on the tax assessment notices that 473,000 self-employed individuals will receive from the tax authorities in 2024, the average tax they will be required to pay will have increased by 1,444 euros. Essentially, 64.3% of the 735,000 self-employed individuals are now being asked to “dig into their pockets.” In contrast, 138,000 will see a reduction in their total tax burden of 560 euros, as this goes “hand in hand” with the phasing out of the business activity fee,  while for 124,000 others, the bill will remain unchanged.

Who “gets off scot-free”?;

Of course, the new system provides that this income “threshold” will be subject to dispute and may be challenged. Also, as mentioned earlier, it provides for reductions for those who have up to two employers and are paid on a “freelance” basis, farmers, young professionals, residents of small villages and islands, and those who have suspended their work or are in hospitals, institutions, etc.).

In detail

-When calculating the minimum (base) wage, any three-year periods of service that the taxpayer has accumulated since first starting their business are taken into account, regardless of the KAD code. The minimum (base) wage increases by 10% for every three years of work as a self-employed person, after the first three years, with a maximum of three three-year periods.

– When calculating the minimum wage, the following are taken into account any income from employment earned by the self-employed individual.

– Time during which the self-employed individual had suspended operations dIt is not taken into account when calculating the minimum wage.

-Self-employed individuals with a newly established business will be eligible for the following reductions in the minimum fee: 100 % for the first three years, 67 % for the fourth year, and 33 % for the fifth year.

– When a self-employed person carries out their business and has their primary residence in villages with a population of up to 500 residents and on islands with fewer than 3,100 residents, the minimum fee will is reduced by 50%.

– When a self-employed person has A disability rating of 80% or higher will be reduced by 50%.

-The minimum wage is presumptive evidence that may be challenged by the taxpayer based on actual events or facts (e.g., military service, hospitalization, imprisonment, etc.).

Business Termination

For those who say real incomes higher than the minimum wage, It will take effect immediately, starting in 2024 a reduction in the business tax by 50%. Meanwhile, those who report income below the minimum wage will have 25% reduction in the business tax %. The business license fee will be abolished within two years.

Impact of implementation – public revenue

Out of a total of 735,320 self-employed professionals:

-The 138,000 will see their tax burden reduced by an average of 560 euros each.

-The 124,000 will not face any additional burden or receive any relief.

-The 473,000 people will pay more in taxes, an average of +1,444 euros each.

According to the Ministry of Economy and Finance, the government currently collects 1.709 billion euros in taxes from self-employed professionals (1.331 billion from income tax and 378 million from the business activity tax). With the implementation of the new system, revenues are projected to increase by 874 million euros; taking into account the elimination of the business activity tax, revenues will increase by 606 million euros.

Impact of implementation – social benefits

An overall reduction of 100 million in benefits for self-employed professionals is expected. The resulting savings for the budget will be allocated to increasing these benefits.

Examples of how the new tax system is applied

1. A new self-employed individual with a declared income of 3,000. He paid 270 euros in taxes and will continue to pay the same amount without any change.

2. A self-employed individual with a declared income of 50,000 euros will see a gradual reduction following the elimination of the 650-euro business license fee.

3. A former self-employed individual with a declared income of 1,500 euros paid 135 euros in taxes and 650 euros in fees. Total: 785 euros. Under the new system, his income is considered to be 14,196, resulting in an increase in his tax burden of 1,038 euros.

4. A self-employed individual with zero declared income and high revenue. Currently, he pays only a business license fee of 650 euros. With the increases in labor costs and high revenue, their taxable income rises to 25,833 euros, resulting in a tax increase of 4,083 euros.

1. A self-employed person with a declared income of 7,000 euros and a turnover of 200,000 euros had to pay 630 euros in taxes and 650 euros in fees. Total: 1,280 euros. Under the new system, we consider 14,196 as income, and because he has a high turnover, this will be increased by 70% to 24,133 euros in taxable income. Overall, there will be an increase in the tax burden of 2,977 euros.

The asterisks

However, there are also a number of issues that need to be clarified. Specifically:

• It needs to be clarified whether the new presumptive method of determining income applies to those who are not salaried employees but have other reported income. This is because, as stated by Deputy Finance Minister Haris Theocharis, the presumption will not apply to salaried employees who also work as self-employed professionals, provided that their salary more than covers the minimum taxable business income applicable to them; therefore, a distinction must be made in cases where other sources of income exist.
• Furthermore, as mentioned, the criterion of the average turnover for each KAD code from the previous year may serve as a “benchmark” for the minimum reported income. Consequently, it remains to be seen whether the “averages” for each KAD will be made public, so that every taxpayer knows in advance, right from the start of the year, what imputed income they are expected to be taxed on.
• How and through what procedures—for example, through the intervention of a tax inspector or another committee—will the deemed income of 10,920 euros be challenged using certain information (military service, illness, etc.)?.
• How, at the same time, tangible incentives will be provided to citizens to request receipts so that they, in turn, can encourage the self-employed sector to adopt a more rigorous approach to tax compliance.
• What will happen to the thousands of small businesses and shops that are still operating, barely scraping by with minimal revenue—but not enough to “shut down”? Now they’ll see their financial burden grow, and as a result, they’ll “face” new challenges with social repercussions.